PSI Virginia Real Estate Practice Exam

According to the Principle of Substitution, the value of a property is primarily set by what?

1. The cost of added features

2. The value of an equally desirable substitute property

3. The perceived demand of the market

4. The location of the property

The correct answer is: The value of an equally desirable substitute property

The Principle of Substitution asserts that the maximum value of a property is determined by the cost of acquiring a similar property that offers equivalent utility or desirability. This principle is based on the idea that if two properties are comparable in terms of their features, size, and location, buyers will not pay more for one over the other; hence, they will choose the less expensive option. This means that the value of a property is ultimately influenced by the value of an equally desirable substitute property—if a buyer sees two similar homes, the one with the lower price becomes more appealing. Understanding this principle is crucial for appraisers and real estate professionals, as it guides them in valuing properties based on market trends and the availability of comparable properties. While factors like the cost of features, market demand, and the property's location do impact value, they are secondary to the Principle of Substitution in determining a property's market value when a suitable substitute exists.